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Unlocking the iPhone is bad for Apple

August 31, 2007 | 4 Comments

It took much longer than we expected, but there are now at least four reported solutions for unlocking an iPhone, two of them requiring software only. (Apple and AT&T needn’t worry about techniques that demand a soldering iron.)

Several people have claimed that these hacks, though obviously bad for AT&T, are good for Apple, because Apple gets to sell more iPhones.

Wrong.

In return for exclusivity, Apple has negotiated a share of the monthly service revenue - up to 10% by some accounts. The iPhone starts at $499, and Apple’s margin on the initial sale may be 50%, or $250. Let’s assume the average iPhone bill is $100 per month (about twice the national average). 10% of $100 per month on a two-year contract is $240, and Apple’s margin on that revenue is near 100%. That would be enough to double Apple’s profit on the sale of the phone. And why stop at two years? How many years have you owned an iPod?

To underscore the importance of the service revenue, Apple told the Street that they would recognize the revenue from the sale of each iPhone over the life of the contract, rather than booking it up front. Widespread unlocking would allow Apple to sell more devices, but with no margin on service. And presumably AT&T can cancel payments to Apple on the locked phones as well if Apple can’t protect their five-year exclusive.

So Apple has very good reasons to fight unlocking. And they have the means to do so: software patches delivered via iTunes. You want to be able to cut and paste? You want instant messaging? Sorry, you are coming back to AT&T.

An arms race has begun, with Apple and AT&T pitted against an army of developers and cell phone dealers. But we think Apple and AT&T will lose. Why? There are at least four reasons: consumer demand, the nature of GSM, the DMCA exemption, and the demands of developers.

No consumer benefits from Apple locking the iPhone to AT&T, as there is no subsidy. (Don’t try to sell us on visual voicemail. We use SpinVox and SimulScribe at Skydeck.) But since consumers are often unable or unwilling to switch networks (mid-contract, in a family plan, employer policy etc.), and since the iPhone is not available at all in many countries, there is plenty of demand for unlocked iPhones. One vendor, UniquePhones, claims that half a million people have asked to be notified when unlocked iPhones are available.

Technology is on the side of the unlockers. The GSM standard assumes that the device and network layer are separate. In a sense the lock is the hack, not the unlock. Existing AT&T customers have to be able to insert their old SIM into the iPhone and s Since AT&T updates SIMs from time to time, new customers must be able to do so as well replace the SIM in their iPhone. This rules out brute force approaches like sealing SIMs inside the phone or supergluing them in at the store. That leaves software locks. We may be wrong, but we suspect that there is no such thing as an unbreakable software lock; not when iPhones have to be able to work on multiple partner networks, and roam on many more.

Apple and AT&T could try chasing hackers throught the courts. But since the Librarian of Congress has ruled that unlocking a cell phone is not a breach of the DMCA, they will have to come up with an entirely new argument.

Lastly, creating an unbreakable lock would be difficult enough if Apple only had to fight the dealers who want to resell iPhones. But Apple and AT&T have got the whole developer community working against them, because they don’t want to allow any third-party native applications on the phone. Instead of writing applications that could make even more money for Apple and AT&T, thousands of developers are trying to hack their phones instead.

Hell hath no fury like a coder scorned.

UPDATE: According to RoughlyDrafted, AT&T has created a SIM especially for the iPhone. In theory the phone is locked to this type of SIM, not merely to the network. But clearly this was not enough to defeat the first round of unlockers. I stand by my claim that Apple will be unable to design an unbreakable locking scheme that works across multiple partner networks and not just AT&T (because they will all have to change their processes to enforce it). RD’s other suggestion - that Apple or AT&T could revoke the IMEI or otherwise brick a phone that was unlocked - would take them into uncharted waters legally. You don’t rent an iPhone, you buy it. If you break it when you try to unlock it, that’s your problem. If they deliberately break it because you unlocked it …

Posted by: Jason
Categories: Mobile Market, Featured